S&P 500′s Dreaded Breakdown Finally Occurs

by Sam Collins | October 9, 2013 2:23 am

S&P 500′s Dreaded Breakdown Finally Occurs

The budget and debt ceiling impasse drove stocks lower Tuesday and prompted many stockholders to cash in on their gains. Although most professionals doubt that a genuine default will occur, many feel that it is time to raise cash as a defensive move.

Tuesday’s sell-off hit some of the best-performing groups of the year, and nine of the S&P 500′s 10 sectors registered losses. The defensive utility sector was the only gainer. Other than utilities, there was no other place to hide as gold, long-term bonds and commodities all closed lower.

At Tuesday’s close, the Dow Jones Industrial Average was off 160 points at 14,777, the S&P 500 fell 21 points to 1,655, and the Nasdaq was hit hard, losing 76 points at 3,695. The NYSE traded 732 million shares and the Nasdaq crossed 501 million. Decliners exceeded advancers on both major exchanges by about 4.2-to-1.

The non-negotiations in Washington are finally taking their toll on investors’ confidence. The CBOE Volatility Index (VIX) closed at its second highest level of the year. Further delays in reaching an agreement will no doubt lead to a new high for the year and lower stock prices.

This S&P 500 chart is much like that of Sept. 23[2], when I said, “Note that the steep angle of the September advance is similar to that of the April-to-May advance, and much like the June-to-July advance before prices flattened out in mid-to-late July.”

But that chart illustrated normal technical “adjustments,” while our current situation is both technical and headline driven — thus a deeper penetration is to be expected.

Tuesday closed on its low — a nasty happening — and rests on the intermediate support line. The next support is at the August low of 1,627 (see Oct. 8 chart[3]), and the final support is at the 200-day moving average at 1,598.

Conclusion: The S&P 500 finally closed below the tenacious support line at 1,676. And the close at the low of the day is a signal that today is again going to be rough on the bulls.

With the stock market’s near-term future squarely rooted in the budget/debt limit negotiations, we should expect a full correction. The stocks that did well, especially technology, biotech and industrials, will probably be subject to the most selling. And since few learned observers think that a true default will occur, we should plan to purchase the strongest stocks in those sectors at attractive prices.

Until the political crisis is sorted out, the Trade of the Day[4] will focus on “buy under prices” for what I consider to be the best buys in those groups.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].